A USfirm Can Invest DM10 Million in Its German Subsidiary and and Receive

question 13

Essay

A U.S.firm can invest DM10 million in its German subsidiary and receive a return of DM4.3 million annually for 3 years.The spot rate is DM1.6/$(U.S.), the U.S.rate of inflation is expected to be 4% annually, and the German rate is expected to be 3% annually.If the appropriate risk-adjusted cost of capital in Dollars is 14%, does the project appear to have a positive NPV?

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Definitions:

Interest Expense

The cost incurred by an entity for borrowed funds, reflecting the interest payments due on any type of debt for a specific period.

Issuing Company

A corporation or entity that releases or sells financial instruments like stocks or bonds to raise capital.

Trustee

An independent party appointed to represent the bondholders.

Selling Price

The price at which a product or service is offered for sale to consumers.